Interest On Unpaid Tax: How HMRC Calculates It And What You Can Do

You open your HMRC statement and the interest charge is nearly as large as the penalty. At 7.75% per year—higher than most savings accounts—HMRC's late payment interest adds up fast. And unlike penalties, it starts running from the day the tax was originally due, not from when you found out about it.

This guide explains how interest is calculated, why it is not the same as a penalty, and the limited but real options you have if you think something has gone wrong.

Note: This guide focuses on income tax and capital gains tax, though the same interest framework (sections 101–103 FA 2009) applies to VAT for accounting periods starting on or after 1 January 2023 (SI 2022/1277). Corporation tax has its own interest rules under section 87A TMA 1970 and is not covered here.

What Interest Is—And Why It Is Not A Penalty

Interest and penalties are different charges that serve different purposes.

A penalty punishes you for failing to do something—file on time, pay on time, or take reasonable care. You can challenge a penalty by showing you had a reasonable excuse. HMRC can reduce it for special circumstances. The tribunal can cancel it on appeal.

Interest is none of those things. It is compensation to HMRC for the loss of use of money you should have paid earlier. It runs automatically from the due date, regardless of fault. There is no reasonable excuse defence against interest. HMRC has no statutory power to waive it. The tribunal cannot hear an appeal against it.

Three things worth knowing up front:

• Interest is simple, not compound. Section 101(8) of the Finance Act 2009 provides that "late payment interest is not payable on late payment interest." You are charged interest on the tax (or penalty) you owe—never on accumulated interest.
• Interest also accrues on unpaid penalties. If you don't pay a penalty within 30 days of the penalty notice, interest starts running on that too.
• Interest runs every day—including weekends and bank holidays. There are no grace days.

How HMRC Calculates Interest

The Formula

Late payment interest is charged under section 101 of the Finance Act 2009 at a rate set by Treasury regulations. The current formula, in force since 6 April 2025, is:

Late payment interest rate = Bank of England base rate + 4%

With the base rate currently at 3.75%, that gives a current rate of 7.75% per annum, effective from 9 January 2026.

Before 6 April 2025, the formula was base rate + 2.5%. SI 2025/386 increased the margin by 1.5 percentage points. If the base rate changes, the interest rate changes with it—check HMRC's interest rates page for the current figure.

Worked Example

You owe £10,000 in income tax for 2023–24. The balancing payment was due on 31 January 2025. You pay it in full on 31 January 2026—exactly one year late.

£10,000 x 7.75% x 365/365 = £775

That £775 is on top of any late payment penalties and on top of the tax itself. If you owed £10,000 and paid nothing for a year, you'd face the tax (£10,000), up to 15% in late payment penalties (£1,500), plus interest (£775)—a total bill of £12,275.

Interest accrues daily. For a partial year, the calculation is proportional: £10,000 unpaid for 90 days at 7.75% = £10,000 x 7.75% x 90/365 = £191.10.

When Interest Starts Running

Interest runs from the date the tax becomes "due and payable" under section 101(4) FA 2009. For Self Assessment, the key dates are:

The backdating trap: If HMRC amends your return or issues a discovery assessment, the additional tax is payable 30 days from the notice—but interest runs from the original due date, not from the date of the amendment or assessment (Schedule 53, paragraph 3, FA 2009). A discovery assessment for 2019–20 issued in 2025 carries interest from 31 January 2021—over four years of backdated interest, calculated at whatever rates applied during that period. The HMRC interest rates page includes a historical rates table so you can check which rates applied to your debt.

The Asymmetry—What HMRC Pays You

When HMRC owes you money—because you overpaid tax, or you win an appeal and get a refund—it pays you repayment interest. But the rate is much lower.

Repayment interest is set at the Bank of England base rate minus 1%, with a floor of 0.5% (regulation 4, SI 2011/2446). At the current base rate of 3.75%, that gives 2.75%.

The gap between what HMRC charges you (7.75%) and what it pays you (2.75%) is 5 percentage points. Before the April 2025 formula change, the gap was 3.5 percentage points—the SI increased the late payment rate but left the repayment rate untouched.

This asymmetry matters when you're deciding whether to pay a disputed tax bill upfront or postpone it during an appeal (more on that below).

Interest During Appeals And Time To Pay

Appeals And Postponement

When you appeal a tax assessment, you can apply to postpone payment under section 55 TMA 1970 while the appeal is pending. But postponement does not stop interest running.

Schedule 53, paragraph 4 of FA 2009 is explicit: the interest start date is "the date which would have been the late payment interest start date if there had been no appeal." If you postpone £20,000 for two years while your appeal works through the tribunal, and you lose, you owe two years of interest—currently around £3,100.

This creates a practical choice. Some appellants choose to pay the disputed tax upfront and claim a refund if they win—HMRC pays repayment interest at 2.75% from the date of your overpayment to the date of the refund. Others prefer to keep the money and accept the interest risk. Neither approach is right or wrong—it depends on your cash position and your confidence in the appeal. But the 5-percentage-point gap between the two rates means postponement has a real cost.

For how interest fits into the broader appeal timeline, see our tax dispute timeline.

Time To Pay

A Time to Pay arrangement spreads your debt over monthly instalments. It does not stop interest accruing—interest continues from the original due date throughout the arrangement.

What TTP does do is prevent late payment penalties. Under the new penalty regime, a TTP agreed before day 15 prevents all late payment penalties. Under the old regime, it can prevent the 5% surcharges from being triggered. That makes TTP worth pursuing even though interest continues—the penalty savings usually outweigh the ongoing interest cost.

Can You Challenge An Interest Charge?

No Right Of Appeal To The Tribunal

Interest is not an "appealable decision" within the meaning of section 31 TMA 1970. You cannot appeal an interest charge to the First-tier Tribunal. HMRC's internal manuals are clear: "There is no statutory right of appeal against interest or power in FA2009 which allows HMRC to mitigate or waive interest."

But there is an indirect route. If you successfully appeal the underlying tax—and it is reduced or cancelled—the interest automatically reduces with it. This is the only way to get an interest charge before the tribunal: by challenging the tax, not the interest.

HMRC's Interest Review Unit

If HMRC's own error or unreasonable delay caused interest to build up, you can ask the Interest Review Unit (IRU) to remit the interest attributable to that delay. The IRU is part of HMRC's Debt Management office in Cumbernauld.

The key requirements:

• The underlying tax must be paid first. The IRU will not consider an objection while interest is still accruing.
• Only HMRC-caused interest qualifies. The IRU removes "only the part of interest that was caused by HMRC error or unreasonable delay and nothing more."
• All of these must apply:
  • Interest was actively accumulating
  • HMRC controlled the case during the period of delay
  • The delay was extensive and unreasonable
  • The delay alone caused the non-payment
  • You were unaware of the debt

Delays caused by you, your agent, or normal HMRC processing times do not qualify. The IRU is an internal HMRC unit—you do not write to it directly. To request a review, call the Self Assessment helpline (0300 200 3310) and ask for your case to be referred to the IRU, or write to HMRC at the address on your most recent correspondence explaining the delay and why you believe it was HMRC's fault.

Escalation Route

If the IRU declines to reduce your interest and you disagree, the route is:

1. HMRC formal complaint (Tier 1, then Tier 2)
2. The Adjudicator's Office—an independent body that investigates HMRC maladministration. Complaints should be made within 6 months of HMRC's final response.
3. Parliamentary and Health Service Ombudsman—via your MP, if the Adjudicator cannot resolve it.

The Adjudicator can recommend that HMRC remit interest caused by maladministration. These recommendations are not binding, but HMRC accepts them in most cases.

Practical Steps

• Pay as early as you can. Every day counts—at 7.75%, each day of delay on £10,000 costs about £2.12. If you can pay part of the bill now and the rest later, do so. Interest only runs on the outstanding balance.

• Set up Time to Pay if you can't pay in full. It won't stop interest, but it prevents late payment penalties—and those can be substantial under the new regime. Contact HMRC to set one up—call 0300 200 3820 for Self Assessment or 0300 200 3831 for VAT.

• If you're appealing, weigh paying upfront against postponing. Paying now and claiming a refund if you win costs you the difference between the rates (7.75% saved vs 2.75% earned). Postponing costs you 7.75% if you lose. There is no universally right answer.

• Request an interest breakdown. Your online Self Assessment statement shows summary totals but not the daily calculation. If the numbers don't look right, contact HMRC and ask for a detailed breakdown showing the start date, end date, rate(s) applied, and daily calculation. Check that payments have been credited on the right dates and that the correct rate was used for each period.

• If HMRC caused the delay, object. Pay the tax first (to stop interest accruing), then write to HMRC requesting an IRU referral. Explain what HMRC did, when, and how it caused the interest to accumulate.

• Check whether the underlying tax is correct. The most effective way to reduce interest is to reduce the tax it's charged on. If the assessment is wrong, appeal it. If the tax is reduced, the interest automatically reduces with it. For guidance on challenging assessments, see our guides to writing grounds of appeal and settling your case.

Key Legislation And Resources

Legislation:

• Section 101, Finance Act 2009 — late payment interest on sums due to HMRC
• Section 102, Finance Act 2009 — repayment interest on sums due from HMRC
• Section 103, Finance Act 2009 — rate-setting powers
• Schedule 53, Finance Act 2009 — special provisions (amended assessments, appeals, postponement)
• SI 2011/2446 — interest rate regulations (original formulae)
• SI 2025/386 — April 2025 rate increase (base rate + 2.5% to base rate + 4%)

GOV.UK guidance:

• HMRC interest rates — current late payment and repayment rates
• Understand your Self Assessment bill — reading your SA statement
• Time to Pay — setting up an instalment plan
• The Adjudicator's Office — independent complaints body

On this site:

• HMRC penalties explained — penalties overview (interest vs penalty distinction)
• Self Assessment penalties — SA-specific penalties and interest
• The new penalty regime — TTP stops penalties, not interest
• HMRC enquiries and closure notices — discovery assessments and backdated interest
• How to appeal to the tax tribunal — postponement doesn't stop interest
• Settling your tax tribunal case — interest runs until settlement payment
• Understanding your appeal rights — interest is not an appealable decision
• The tax dispute timeline — interest throughout your dispute

This article is for informational purposes only and does not constitute legal or tax advice. For advice specific to your situation, consult a qualified tax adviser, accountant, or solicitor.